2021 has been a challenging year for the Amigo (LSE:AMGO) share price, to say the least. After moving from a low of 5.26p in January to a high of 30.30p in May, the woes of the guarantor lender looked like they were finally over. That was until it all came crashing down.
Since the start of September, the Amigo share price is once again on the rise. So, the question becomes, is this a temporary spike? Or is Amigo finally making a comeback? Let’s take a closer look at what’s going on and whether now is the time for me to buy.
The collapse of the Amigo share price
The last time I looked at this business was in May, shortly before the firm heard the court ruling surrounding its scheme of arrangement. As a reminder, Amigo entered into a world of trouble back in 2019. Under the leadership of old management, the firm started engaging in predatory lending. This resulted in a surge of customer complaints to financial regulators as customers (and their guarantors) simply couldn’t afford to pay the 49.9% interest rate on the issued loans.
Long story short, Amigo has had to satisfy a lot of customer claims and repay its creditors all at once, causing the stock to collapse by 95% between 2019 and 2020. A scheme of arrangement was supposedly the last option to save the business. Unfortunately, the scheme was ultimately rejected by the courts, triggering Amigo’s share price crash in May. But since the company is still alive today, management may have been a bit melodramatic, especially since the stock is on the rise this month.
A turnaround in progress?
Amigo recently published its first-quarter results. And there were actually some encouraging signs. Management has suspended any additional lending until the current situation has been resolved. This decision has caused revenues to suffer by 33%. But, the impairment ratio has been slashed from 37.9% to 23.4%. In other words, more customers are actually paying their bills.
The rise in payments is in part due to the shorter than expected Covid-19 impact. But another contributing factor is that no new complaints have been filed against Amigo in the last three months. As a result, the lender actually noted a £15m profit before tax this quarter, up from £1.4m a year ago.
Needless to say, this is a positive sign of progress for the troubled business. So, seeing the Amigo share price rise on the news is hardly surprising.
Is the rising Amigo share price a buying opportunity?
As encouraging as this latest performance is, I’m not tempted to jump in anytime soon. Why? Because Amigo still has a lot of debts to repay. In April 2020, the firm negotiated a suspension of interest payments on its obligations with creditors. This suspension comes to an end later this month. So, I wouldn’t be surprised if profits margins suddenly take a hit.
All things considered, the Amigo share price looks like it’s back on track. But I expect significant volatility as the underlying business attempts to claw itself back to financial health. Personally, that’s not something I’m interested in adding to my portfolio, so I’m keeping Amigo on my watchlist for now.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.